How Founders Can Protect Wealth Before a Liquidity Event: A Hypothetical $5.8M GRAT Transfer

For founders approaching a major milestone, such as a Series B raise or an acquisition, a Grantor Retained Annuity Trust (GRAT) is one of the most widely used tools for moving future appreciation to family.

A liquidity event strategy for business owners isn't just about what you earn from the sale; it's about what you keep. If you wait until your company's valuation rises to transfer shares to your family, the gift is valued at the higher price, which can use up far more of your lifetime exemption or trigger gift tax. The opportunity is to move assets before the market prices in your success.

How a GRAT works

You transfer shares into an irrevocable trust for a fixed term, often two years. The trust pays you an annuity over that term, sized so that the payments return the value you contributed plus interest at the IRS Section 7520 rate. Because you get back what you put in, the taxable gift can be close to zero. Any growth above the Section 7520 rate stays in the trust and passes to your beneficiaries, typically your children or a trust for them, when the term ends.

Hypothetical case study: shifting about $5.8M to heirs

The following is a hypothetical example. A tech startup founder's company is valued at $5 million. The founder expects a Series B raise that could lift the valuation to more than $20 million within 18 months.

Rather than waiting for that increase, the founder's advisors set up a two-year GRAT:

• The transfer: The founder contributes $2 million of stock, valued by a qualified appraisal at the $5 million company valuation.
• The valuation increase: The company hits its growth milestones, and the shares inside the trust grow to $8 million.
• The annuity payments: The GRAT pays the founder two annual payments totaling about $2.17 million: the original $2 million plus interest at the Section 7520 rate (5.60% in October 2026). Because the stock is illiquid, the payments are made in shares at their appraised value when each payment is due.
• The transfer to heirs: The remaining value of roughly $5.8 million passes to a trust for the founder's children without gift tax.

If the founder's estate is above the federal estate-tax exemption ($15 million per person in 2026) and taxed at the 40% top rate, keeping that $5.8 million out of the estate would avoid about $2.3 million in federal estate tax.

How can founders protect wealth before a liquidity event?

The example highlights several action items for your own business succession and wealth transfer plan:

• Timing matters most: In this example, the strategy works because the appraisal was completed before the Series B term sheet was signed. Once a term sheet or LOI exists, the appraisal generally has to reflect it, which raises the value of the gift and shrinks the benefit.
• Plan ahead of growth catalysts: Don't assume your current valuation will hold. If you can see a major growth catalyst coming, start the planning conversation early.
• Coordinate your advisors: A GRAT requires coordination among your CPA, estate attorney, appraiser, and wealth manager to set the timeline and handle the mechanics correctly.

Risks and costs to weigh

• You must outlive the term: If you die before the GRAT ends, the assets are generally pulled back into your estate.
• Growth must beat the hurdle rate: Only growth above the Section 7520 rate passes to heirs. If the shares grow less, nothing transfers.
• Setup costs: Legal fees, a qualified appraisal at funding and for each in-kind payment, and trust administration are paid whether or not the GRAT succeeds.
• No step-up in basis: Your heirs receive your original cost basis in the shares, so they may owe capital gains tax when they sell. If the shares are qualified small business stock, gifted shares generally keep their QSBS status, which deserves its own review.
• Income tax stays with you: A GRAT is usually a grantor trust, so you pay the income tax on its earnings during the term.

For a broader checklist, see Planning for a Liquidity Event: Steps to Take Before and After.

Planning a liquidity event in the next 12 to 24 months?

If you are expecting an exit, a major funding round, or a significant growth milestone, start before the term sheet is signed. Ryan Firth, CPA/PFS, CFP®, leads tax planning for business owners at Integrity Financial Planning, a fee-only fiduciary financial advisor in Houston. Schedule an introductory meeting to talk through whether a GRAT or another pre-liquidity strategy fits your situation.

This is a hypothetical case study provided for educational purposes only. It is intended to illustrate how a GRAT can work and does not represent the experience of any actual client. Figures are rounded and assume a two-year GRAT funded in October 2026 at a 5.60% Section 7520 rate, a 40% federal estate-tax rate, and an estate above the federal exemption. Actual results depend on valuations, interest rates, tax law, and individual circumstances, and are not guaranteed.